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spk06: Hello and thank you for standing by for Baidu's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'll now like to turn the meeting over to your host for today's conference, Juan Lin, Baidu's Director of Investor Relations.
spk08: Hello, everyone, and welcome to Baidu's first quarter 2021 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire Services. On the call today, we have Robin Li, our co-founder and CEO, Herman Yu, our CFO, and Do Shen, our EVP in charge of session feed. After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with ICC and Hong Kong Exchange. Baidu does not undertake any obligation to update any forward-looking statement except as required under applicable law. Our earnings press release and this call includes discussion of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures, and it's available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to our CEO, Robin.
spk02: Hello, everyone. We delivered strong results in the first quarter, with Baidu core revenue growing 34% year-over-year to RMB $20.5 billion. Our business was strong across the board, particularly in our new AI business, including cloud, smart transportation, and intelligent driving. Non-advertising revenues within Baidu Core rose 70% year-over-year to RMB 4.2 billion, accounting for 21% of Baidu Core. China held the two-session annual congressional gathering in early March. and technology innovation was repeatedly mentioned. It was emphasized that never in the history of China has innovation been more important to the development of China. China's pursuit of innovation through technology to boost long-term growth and productivity will further expand the use of AI. We have witnessed AI platforms for AI-powered infrastructure enabling applications, disrupting markets. For example, we entered the smart device market three years ago, despite two dominant market leaders with strong manufacturing and distribution capabilities. We leveraged Baidu's leading AI technology, including natural language processing and speech recognition, to make dual OS smart assistant understand humans better. This, in turn, has resulted in making Xiaodu smart display number one in shipment globally. We further changed the market dynamics by introducing smart devices over RMB 1000 compared to the sub-RMB 100 devices that our peers focused on. AI-powered platforms are changing the technology landscape New vehicles are being equipped with sensors and AI capabilities both internally and externally to provide intelligent driving and in-vehicle infotainment. Apollo serves as the AI platform that powers the two critical functions of intelligent vehicles. Apollo Autonomous Driving is making new breakthroughs and over 1.5 million vehicles have been sold in China pre-installed with Dual OS for Auto. Installation of Dual OS for Auto saw continued strength in the first quarter, growing over 100% year over year. According to IHS, over 50% of the vehicles sold in China this year are expected to be connected. and the percentage is expected to rise. We are excited to be deploying V2X vehicle-to-road infrastructure across China, which enables connected vehicles to be more intelligent. Just as the continuous upgrade of telecom networks since 2G has enabled mobile phones to become better and smarter, we believe Apollo smart transportation infrastructure can be continuously upgraded to make connected vehicles more convenient, safer, greener, and in general, more intelligent over time. As we build Apollo V2X infrastructure in cities across China, we are getting requests to expand our smart transportation offering through greater use of AI into math and solutions to digitize public parking and highways. The expansion of Apollo Smart Transportation beyond B2X into different facets of transportation in metropolitans and highways leading into them will create a powerful network effect when the solutions are integrated and synchronized on a transportation network powered by B2Brain. Our development of paths for different industries and empowering our ad customers with Marketing Cloud are further examples of how AI platforms are changing industry dynamics from digital transformation to mobile internet. On the latter, we have a big opportunity to expand online marketing from selling traffic to empowering merchants with AI-powered Marketing Cloud. and improve search to transaction conversion. Our strong internet foundation, coupled with growing user engagement, provide us with another driver for non-advertising growth. Turning to Q1 operational highlights, our AI cloud continues to see strong adoption due to our holistic approach, including a large developer community, self-designed chips, best-in-class machine learning services, and large AI patent portfolio. With increasing AI adoption in China, Baidu Pedopedo has become a top-one deep learning framework globally in terms of pull requests, alongside with Facebook PyHodge and Google TensorFlow, according to GitHub. We have spent years in developing AI chips, to optimize workload and improve cloud cost structure. With external demand for GPU chips, Baidu Kunlun completed its first round of funding at a post-money valuation of US dollar 2 billion in April this year. Baidu EZDL, a simple-to-use machine learning service for non-developers, was rated number one in terms of usage in China per IDC. topping the list for the second time. Customers are telling us that they are choosing Baidu due to us having the largest AI patent portfolio in China. Baidu's decade-long experience with AI technology and our large patent portfolio give customers the confidence that we can deliver end-to-end cloud solutions with PaaS and SaaS that meet their needs. Last quarter, we illustrated AI solutions that were scalable and replicable across different industries, such as our automated AI call center. We are also seeing customers who implement Baidu AI Path return for repeat purchases. For example, we helped a major retail bank in China implement Baidu AI Path, which has led to five follow-on purchases. including application to automate customer service and customer loan approval, and the recent purchase of a private cloud service. In the media sector, we partnered with online arm of China's largest TV network, CCTV, to implement Baidu AI Path. Its capabilities to automate video clip creation and tagging from live broadcasting and use smart assistant to quickly locate desired video content. During the two sessions, we enabled cct.com to interview congressional meeting participants with AI reporters, powered by Vidal Brain, and to timely share these interviews on the internet. Smart transportation is becoming a way to digitize the transportation industry in China. to improve traffic condition and road safety, and reduce carbon emission. Our V2X vehicle-to-road infrastructure has helped reduce traffic congestion time by 20 to 30 percent. Chongqing, which implemented Apollo V2X last year and opened the door for Apollo into western China, re-engaged with us this year to make their smart transportation infrastructure 5G-enabled, laying the foundation for a future rollout of Robotaxi ride-hailing. Chengdu, the capital of Sichuan, and a leader in science and technology development, recently partnered with Apollo to implement V2X2. Turning to intelligent driving, Since its founding eight years ago, Apollo has accumulated over six million miles of level four autonomous driving testing miles on the road and over 600 million miles of simulated testing. Apollo continues to be the leader in autonomous driving in China with our early investment, open platform strategy, and comprehensive technology infrastructure. With Apollo Autonomous Driving can operate independently on vehicle sensors. It is uniquely empowered by Baidu's HD maps, our AI cloud, and Apollo smart transportation. The comprehensive data set and integration with the city's smart transportation network, we believe, will enable Apollo to offer better driving behavior and reduce incident rate. Following the opening up of highway testing for autonomous driving in January, Apollo received the permit to operate at night and under special weather conditions on public roads in Beijing. Apollo also received a permit to pilot fully autonomous driving in Beijing, Changzhou, and Changsha. Apollo Go, China's first fully autonomous driving heating service, with no one in the driver's seat, is now open to the public at the Shougang Park, a Beijing 2022 Winter Olympics site. Rides are priced at 13 RMB each. In March, ApolloGo began to charge the robo-taxi ride hailing in Tangzhou based on the distance traveled starting with a minimum fare similar to regular ride hailing. Jidu Auto, an intelligent EV company established in partnership with Geely has appointed Xia Yiping as CEO. Yiping previously served as CTO at Mobeck and worked various positions at Fiat, Chrysler, and Ford. We welcome Yiping to the Baidu family and look forward to his contribution to innovate the smart EV sector. Apollo Self-Driving GAC Group joins Apollo's network of over 10 leading local and multinational automakers to install ASD services in its new vehicles. According to China Insights Consultancy, a market research and consulting firm, the TAM for Apollo Intelligent Driving, which includes robot taxi ride-hailing, EVs, and self-driving services for automakers, well-reached US dollar $467 billion, almost nine times the size of our advertising talent of $53 billion in 2025. Apollo platform powers Jidoo and other automakers, as well as Apollo Go Robotaxi. It is in a unique position to be well-funded and widely adopted. Such coveted position has earned Baidu the only Chinese company selected for the leader category in autonomous driving by GuideHouse Insights, previously known as Navigant Research, for the second consecutive year. Turning to mobile ecosystem, in March, Baidu app MAUs reached 558 million. Creators on Baidu more than doubled. and the number of smart mini programs grows 74% from a year ago. Our AI building blocks, coupled with our marketing cloud, continue to attract more third-party content and service providers onto our platform, which improves user experience. Merchants are adopting our direct-to-consumer model to get closer to their customers. Traditional e-commerce tends to accentuates its platform over the strengthening of individual brands and merchants. Baidu, on the other hand, empowers merchants to build their own online presence and grow their brand by leveraging our social and live streaming capabilities, e-commerce features, and AI tools from our marketing cloud. Our AI building blocks, coupled with marketing cloud, help merchants acquire customers better understand them, engage with them, and perform lifetime customer management. Such search-to-transaction closed-loop experience improves user stickiness, resulting in daily log users on Baidu app reaching over 75%. That's up 16 points from a year ago. Social and interest-based communities. Our search users sometimes have questions on their search results. With professional content providers like attorneys and designers opening enterprise accounts on Baijia Hao, they are able to respond to search queries and interact directly with users. 8% of our top one search results now enable users to ask questions and interact with the original content provider. Baidu Health has attracted approximately 300,000 doctors and medical experts to provide in-depth authoritative content and online consultation to consumers. As our users adapt to more services on Baidu, we see a great opportunity to offer non-ad services of our own to meet the needs of our large user base. When you couple this with the robust growth of our AI business, non-advertising revenue could possibly exceed advertising revenue within Baidu Core in the next three years. With that, let me turn the call over to Herman to go through our financial highlights.
spk13: Thank you, Robin. Hello, everyone. Welcome to Baidu's first quarter 2021 call. All monetary amounts used in my discussion are in renminbi unless otherwise stated. In March, we listed on the Hong Kong Stock Exchange under the ticker number 9888, raising 3.1 billion U.S. dollars. Two weeks later, we were added to the Hong Kong Tech, the Hansen Tech Index, the Composite Index, and the China Enterprise Index. Lifting closer to our user base with strong brand and unique profile, as a leading AI company with strong internet foundation generates incremental interest for Baidu and increases our stock liquidity. Our retail trench during the Hong Kong listing was 111 times oversubscribed. Our daily trading liquidity on the two exchanges in aggregate averaged 8.4 million shares last week. ADS adjusted and approximately 1.6 billion US dollars in amount. compared to, say, 2.8 million average daily traded shares last September, or approximately $350 million in amount. That is an increase of 4.5 times in dated trading amount on Baidu over the past seven months. Sustainability is an important focus for Baidu. We have worked diligently on ESG and were upgraded twice by MSCI last year. Greenpeace, a global... Environmental Organization published a report on China's cloud and data center companies ranked by Baidu top three in cloud services and number one in the utilization of renewable energy. Based on their April report entitled Clean Cloud, Tracking Renewable Energy Use in China's Tech Industry. Turning to financial highlights. For the first quarter of 2021, Baidu revenue reached 28.1 billion RMB, or 4.3 billion US dollars, up 25% year-over-year, driven by the growth of Baidu Quora, whose revenue reached 20.5 billion RMB, or 3.1 billion US dollars, up 34% year-over-year. Non-advertising grew 70% year-over-year, accounting for 21% of Baidu Quora's revenue. Let me give you more color on each area. AI Cloud was 2.8 billion, up 55% year-over-year, and we expect our AI Cloud growth rate to accelerate in the future. Our Cloud growth benefited from customers from the Internet media, financial services, and other high-tech sectors, as well as from the strong adoption of Apollo Smart Transportation by cities seeking to modernize digitalized transportation and network vehicles. Intelligent driving and OGI revenue also grew rapidly. Apollo self-driving, or ASD, though a small base, grew over five times from last year. ASD revenue is booked upon vehicle shipment, and revenue is recognized rapidly over the contract period if the service is provided over the air, in other words, upgraded regularly. Revenue push shall do smart devices and services saw robust double-digit growth in the first quarter. Online marketing revenue was up 27% year-over-year, driven by Baidu app, going over 30% year-over-year. Most of our top ad vehicles performed well. CPM was up double digits. Managed page grew, managed page reached 35% of Baidu core online marketing revenue, and four-fifths of our advertisers have adopted Baidu Marketing Cloud, which is a one-stop shop to purchase online marketing, build audience, and leverage Baidu AI to enable user lifetime management. The strong adoption of our managed page in Marketing Cloud shows our customers' preference to move from managing their own website to operating their hosted site on Baidu to better leverage Baidu's advanced technology and tools to improve closed-loop transactions. IT revenue reached 8 billion RMB, up 4% year-over-year, and its net losses narrowed to $1.3 billion, down from $2.9 billion last year. IT subscribers reached 105.3 million, serving as a strong foundation to support their over 50 in-house studios and produce entertainment blockbuster originals. Cost of revenues was $15 billion, up 2% year-over-year, primarily due to an increase in tax and cost of goods sold. offset by a decrease in contact cost and amortization impairment of intangible assets. Baidu Core's cost of revenues increased 15% year-over-year as tech revenues increased, while IAT's cost of revenue decreased 10% year-over-year. Operating expenses were $10.3 billion, up 25% year-over-year, primarily due to an increase in channel spending and promotional expenses, as well as R&D-related personnel expenses. SG&A for Baidu Core was up 58%, partially reflecting the ramp-up of our sales force, especially to support the pipeline of our new AI business as we look out the next 6 to 12 months. In addition, we approved for bad debt allowance on new AI business, which holds accounts receivable, unlike our online marketing, which generates revenue mostly on a prepaid basis. Non-GAAP operating income for Baidu and Baidu Core were 4.4 billion and 5.1 billion, or 773 million US dollars, respectively. Non-GAAP operating margin for Baidu Core was 25%. Adjusted EBITDA for Baidu and for Baidu Core were 5.9 billion and 6.5 billion, or 990 million US dollars, respectively. Adjusted EBITDA margin for Baidu Core was 32%, compared to 30% last year. Cash and short-term investments for Baidu and Baidu Core as of March 31st, 2021 were 172.9 billion and 159.6 billion or 24.4 billion US dollars respectively. Free cash flow for Baidu and excluding IT were 2.6 billion and 4 billion or 615 million US dollars respectively. Baidu Core had approximately 34,000 full-time employees as of March 31, 2021, up 18% from last year. Turning to second quarter guidance. For the second quarter of 2021, Baidu expects revenue to be between $29.7 billion, or $4.5 billion, and $32.5 billion, or $5 billion, representing a growth rate between 14% and 25% year-over-year. which assumes that Baidu Core will grow between 20% and 33% year-over-year. This guidance does not give any potential contribution from the acquisition of YY Live. The above forecast reflects our current and preliminary view, which is subject to substantial uncertainty. Before I turn the call back to the operator, let me summarize our first quarter results. We continue to see strong momentum in our business, powered by our leading AI, Non-advertising revenue grew 70% from last year, accounting for over one-fifth of Baidu core revenue. China's goal to drive innovation through technology will serve as a tailwind for our new AI business. Embarking on the digitalization of transportation and connected vehicles is like investing in a new telecom network to drive economic growth and productivity, except this time it is on a transportation network and the connected computers are smart vehicles rather than smartphones. Transportation is 16% of China's economy. Thus, AI platforms that power smart transportation, autonomous driving, and vehicle infotainment working in tandem can bring incredible operating efficiencies and convenience, as well as improve traffic safety, reduce carbon emission for the transportation sector. Apollo autonomous driving continues to be the leader in China, with fully autonomous ride-hailing open to the public in Beijing. Apollo Go ride-hailing is now available to the public in three cities. We are quite encouraged that Apollo Go ride-hailing is gradually permitted to charge a fee, for example, in Changzhou as well as in Beijing. Over 10 domestic and multinational automakers have signed up with Apollo to install ASD in their new vehicles. A recognition by the auto industry that partnering with Apollo is the preferred choice versus committing to heavy investments in a time-striving industry. for the next decade or maybe two. Apollo's open platform and diversifying monetization to support Atom's driving through ASD, Jidoo Auto, and Apollo Go ride-hailing put Apollo in a unique position to be well-funded and widely adopted. IDC ranks Baidu number one in Atom's solution for public cloud. By focusing on AI paths, our AI cloud is differentiated in the market. We are seeing the implementation of our AI paths drawing repeat purchases, and over the long run, we expect our AI cloud business to have higher margins as we build on our past and SaaS business compared to pure-ass players. Advertising revenue growth was solid, up 27% year-over-year. Merchants are adopting our direct-to-customer model to get closer to their customers, and Baidu's open platform model to accentuate the merchants. by allowing them to build their brands on Baidu, access their own user data, and leverage Baidu's AI-powered cloud services is a huge opportunity for our mobile ecosystem. ESG is an area that we focus on. In addition to leading the industry in cloud and data center construction, we hope to contribute to sustainability in a big way, as we help cities across China deploy smart transportation to significantly improve the flow of internal combustion engines, and promote the crossover to EVs. Baidu is also developing smart EVs, empowering automakers with intelligent driving services, and providing robo taxi, ride-hailing, and robo buses, which are all powered by EVs. Baidu returned 300 million US dollars to shareholders under the 2020 share repurchase program this year, bringing the cumulative repurchase from last year to 2.2 billion US dollars. We are confident about our future on the strong profitability of our search and feed business and how we are using the AI technology developed from this business to fuel growth in the new AI business, which, along with our other non-ad business, has a TAM ten times the size of our online marketing business and three times the CAGR growth to 2025, even when you exclude robot taxi ride hailing, according to CIC. Operator, with that, let's now open the call to questions.
spk06: Thank you, ladies and gentlemen. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for a name to be announced. If you wish to cancel a request, please press the power or hash key. Participants are requested to restrict one question at each time. First question comes from the line of Alicia Yap from Citigroup. Please go ahead.
spk10: Hi, thank you. Good evening, management. Robin and Herman, thanks for taking my questions. Congrats on the solid results and guidance. My question is related to cloud, your AI cloud business. So wondering if management could share some of the operating metrics, for example, the total numbers of the cloud customers and also the industry vertical that you are, you know, major in. And then also, for example, like, you know, how much or how big it is coming from the governments or the big enterprise versus the smaller SME merchants in terms of using your cloud business. And also the current loss ratio that if you can share and how you envision your cloud business to grow into in the coming quarters and years. Thank you.
spk13: I cannot hear him. Hello? Hi, Alicia. Hello? So, yeah, you guys hear me okay?
spk10: Yeah.
spk13: Yeah, so the way we look at our cloud business, the way we look at our cloud business, as you know, in our AI cloud, there are several segments to our businesses. Number one is our familiar infrastructure cloud where we have Ask, where we have Path, and where we have SaaS. In that segment, we have our key accounts, and then we have our SMEs, which are much smaller cloud providers. So you have your typical key accounts, and then when you have SMEs, we have many, many customers there. In addition, we also have our customers for our smart transportation in that space. So that would be the key cities, the top tier cities that we are in China. We don't have this exact number prepared for you today, but you can think of our segment as mostly smart cities and mostly key accounts in our AI cloud. you know, our top sectors are things like internet, media, financial services, and transportation. And when you look at, you know, how we're growing, I think last quarter we said we're growing at 67% year-over-year. This quarter, we're growing a little bit slower at 55%. Part of the reason is because if you recall last year, COVID-19 started toward the end of January. We did, you know, we had a pretty good base in Q1 because typically if you think about it, you know, COVID-19, you know, impacted us a lot. But when you think about the beginning of the quarter, you know, we had a higher base. So the way I would look at it is, you know, we think that we can continue to grow the way we did last quarter, you know, higher than what we have at 55% this quarter. We think that we see in our pipeline that we should be able to grow at a higher rate.
spk10: Okay. Thank you, Herman.
spk06: Thank you for the questions. Next question comes from the line of Piyush Mubai of Goldman Sachs. Please go ahead.
spk07: Hi, Rob and Herman. Thank you for taking my questions. When I look at the core, the core seems to have bounced back very nicely in both the first quarter as well as based on the guidance you're providing for the second quarter. And the marketing revenue was up 27%, I suspect, in the second quarter based on the high end of the range of 33%. It would be a similar number. Could you just take us through some of the verticals where you're seeing spending come back very nicely so that we can try and see whether this is sustainable through the rest of the year with a clear emergence of a trend coming back very nicely? That's the first question. And if I might slip in a second question, you talked about the term for ride-hailing. I wonder if you could just take us through what your strategy is and how deep you want to go. Thank you.
spk02: I'll ask Doug to answer your first question, and I'll take on the second one.
spk04: Okay. For the first one, actually, we see pretty good performance for most of the top ad verticals, actually, not just by a single one. Actually, talking about the performance of the ad revenue, I think it's not only because of the low base of last year's first quarter. I want to actually give the credit to the three building blocks we have been you know, working on in the past few years. As Robin mentioned, you know, in the prepared remarks, Baijiahao and SmartMini program and also the managed pages, they all grow quickly. And, you know, these building blocks, actually, they provide a high-quality content and also the services to the users, so that the users, you know, they can not only get the information as before, but they can also get the service in the, you know, closed-loop experience. And with that, you know, the user, they can complete their tasks, like book a flight or buy a book in one-stop style instead of dropping away. So all of these building blocks actually, they contribute to the monetization capability we have built, especially for Baidu AVP. So we can see it actually grows even faster than the average 27%. It's more than 30%. So with that, actually, we are seeing pretty good you know, performance for all the verticals on the way down the road.
spk02: Yeah, so for the TAM of Apollo, it's huge. It's very large and right now it's growing very fast. If you recall, we started to invest in autonomous driving roughly eight years ago. Over the years, Apollo has morphed into a very comprehensive platform that supports all kinds of BIM models and directions. That includes Robotaxi, that includes a software service provider for the OEMs, and also that includes building our own smart EVs. I think all of this effort feedback, data, and other kinds of market signals to the Apollo platform, making Apollo a stronger and better platform for both autonomous driving and smart transportation. We're very excited that each of these directions, including the smart transportation project we're building for many, many cities because it all can be integrated together and provide a much more efficient transportation system for the cities, for the society, and provide better experience for the drivers and the consumers. It all comes together. We are very happy we invested early, and we started to react to the benefits of all of this direction.
spk06: Thank you for the questions. Next question comes from Alex Yao of JPMorgan. Please go ahead.
spk11: Hi, good evening, management. Thank you for taking my question. I have a couple of follow-up questions on the cloud. Robin, you mentioned deployment of a V2X infrastructure will generate network effects to your broader Apollo strategy. Can you elaborate that network effect a little bit more? And also, what strategic benefits will the broader Apollo ecosystem benefit from the buildup of your V2X infrastructure in China. Then the near term financial question is, Herman, I think you mentioned despite of the strong, in addition to the strong growth momentum in first quarter, you expect the cloud revenue to further accelerate into the coming quarters. Can you talk about the fundamental driver to the strong revenue growth momentum particularly in the smart city market. What is your competitive edge? Who do you see as the biggest competitor? And what are the unique value proposition you bring to this market segment? Thank you.
spk02: Yeah, for the V2X projects, it's quite clear that the sensors build on the goals. can communicate with the vehicles. Therefore, vehicles, be it with autonomous driving capabilities or not, they are connected. So they can get signals from the infrastructure and therefore become more informed when deciding on the driving behavior. If there's a driver on the car, we can alert on any risks that's not directly visible by a human eye because there are sensors surrounding the environment that can alert the driver and also better tracking driver behaviors in some cases. For example, in the city of Guangzhou, there are some commercial trucks their license plates could be covered by mud so that the drivers were not afraid of violating the traffic laws. But now with the V2X infrastructure and on-vehicle devices sometimes installed on those trucks, the city regulators can much better track those violations. making the road safer and more efficient. Of course, with vehicles with autonomous driving capabilities, they can be assured that the infrastructure can send signals to those kind of vehicles and help the vehicles to better assess the environment, therefore improve the accuracy of the planning and controlling process for autonomous driving. The more V2X projects we deploy, the more cars can benefit from this kind of infrastructure. Therefore, the autonomous driving capabilities can improve faster and also become safer for the passengers of the car. Also, it can reduce the cost of a single car because sometimes you don't have to rely on very expensive onboard devices such as high-end lidars in order to really drive fully autonomous. Herman?
spk13: Yeah, and to add to what Robin just said, I think a couple of things. You know, you asked us for smart transportation, what are the growth drivers? One thing is recognize, you know, how AI works, right? That the more data you have synchronized, it becomes more powerful. So what V2X does, for example, in Guangzhou is 102 intersections where we are offering an AI solution that allows the traffic lights to be synchronized throughout that whole part of the city. Okay, so when you think about that and, you know, the chance of getting that phase two so that the first phase of the project is synchronized with the second phase, that would give you that kind of network effect. So that's why, for example, when you see in the city of Balding, when we first had our first phase, we'll call back for a second phase because you want that second set of lights through that part of the city to be synchronized. And then we even see, for example, now a third part of the phase as we continue to expand the traffic lights. So that's one way to expand our business is to continue to take in more area of the city and be able to synchronize all of the traffic lights, synchronize the traffic flow. And you asked us our competitor. We see competitors in the area, but we don't see them focusing on a whole part of the city. They're more looking at one light at a time, but we're using Baidu Brain to power the whole thing. And our opportunity is, in addition, as Robin mentioned in the prepare marks, once you go in there with V2X, you have the opportunity to go in there with MASS, right? MASS is our open platform in which it controls robot taxis and robot buses. Like in Guangzhou, not only does it, you know, power the robot taxis that Apollo have, you also have robot buses in there. You also have another brand of robot taxi that our MASS is powering. So you can think of it as the operating system for that part of the city. And whenever there are other robo-taxi transportation and so forth, the government uses our masks to kind of power those robo-taxi, robo-buses so that you could prioritize the rides and so forth. And then there's other product expansions like for example, going to highways, going to parking and so forth. So the more of these projects are synchronized, obviously through AI and so forth, you're going to make the traffic moves smoother. So you're seeing two trends. One is as we're going into cities, we're getting multiple phases, we're expanding the products, and you're also seeing us entering more and more cities because a lot of cities in China now, they're leveraging on technology to improve their infrastructure rather than closing down roads and taking on more land in order to widen the roads to basically reach the same goal.
spk06: Thank you for the questions. Next question comes from the line of Jerry Liu of UBS. Please go ahead.
spk14: Hey, thank you. Thank you, management. If I may go back to your earlier statement about how non-ad revenues could surpass ad revenues in the Baidu core in three years. So, I mean, that makes me feel that, you know, you guys see more I have a bit more visibility and confidence of this mix shift. So I just want to ask, what are some of the drivers you're seeing here? Now, obviously, you know, Cloud, Apollo, maybe Huawei Live all can contribute to that. But I'm just wondering what are maybe the bigger drivers in this mix shift? Thank you.
spk02: Hi, Kerry. This is Robin. I don't know if you noticed that we see, what kind of company by the way, we see that we are a leading AI company with strong internet foundation. That means that we can not only benefit from the investment we did over the past like 10 years to get into more new businesses like intelligent driving, smart cloud, we also can leverage our AI capability to better monetize our strong user base we accumulated over the past 20 years. If you compare the Baidu mobile ecosystem with other leading mobile ecosystems in China, you notice that we are probably one of the very few that has online marketing revenue as the majority of total revenue. This is not a very reasonable situation. Our hundreds of millions of users can enjoy other kind of services on Baidu, not just clicking on ads. They can pay for premium content. do e-commerce transactions, they can play games, they can watch live streaming and tip their influencers. There are a lot of things we can do and as we deploy more closed-loop user experience within the Baidu app and as we leverage our AI algorithms to better recommend services and better understand users' needs, we can monetize the strong user base through multiple ways. That's how we look at this landscape.
spk13: And just let me add to that to Robin. You know, you asked us what are the key drivers. I think Robin was very clear. You know, when you look at a mobile ecosystem, our non-advertising here, because we can leverage our huge user base, right? We're reaching over 1 billion mobile devices per month, right? So in addition to that, we talk about our cloud. You know, you look at a cloud, you know, it's – pretty significant in size right now, and it's still growing very robust. And I think, as we mentioned before, there's two main areas that's driving the growth. One is our infrastructure cloud. You have us differentiating with AI solutions, like the prepared remarks. Whenever we go into big customers with AI paths, we're seeing them having cross-selling and having up-selling. So not only does it sell more paths and applications, you're also seeing them, for example, you know, crossing into apps. Like the example we gave, you know, one bank started buying, you know, private cloud as a result of building that relationship with us. So we're going to see that digitalization of enterprises drive ourselves, I think, particularly in AI paths, particularly in applications. And it's also going to allow us to go into the apps of that business. you know, smart transportation we talked about, we think that that's a huge opportunity. When you look at, for example, just last year in the number of projects that China has with, you know, transportation and so forth, there's probably over 300 cities. I think there's 302 cities accorded by the government that have transportation projects. So there's huge opportunity for us in that area. And then when you're looking at OGI, We look at a few areas. You look at, for example, our Duo OS with smart display, smart devices, and so forth. You're looking at, for example, Apollo self-driving. We're signing up a lot of OEMs as they're starting to ship their cars in the next few years. You're going to see more and more come on. For example, in this year, just for example, ASD was seen in the pipeline. by the end of the year we should have maybe four automakers in our ASD. And then on top of that, we're already testing Robotaxi ride-hailing. For example, it went live in Beijing. So we should see that pretty exciting in the next couple of years. So here are just some of the areas that we think that there's potential for growth. And because the CAN is ten times and the CAGR is three times of advertising, And you look at the pace that we have gone through, right? If you recall, just two quarters back, our non-advertising was growing 14%. Last quarter, you know, we said it was a little bit higher at 52%, and this quarter we're seeing 70%. So you're seeing us, you know, really, you know, starting with our, you know, firing power for our non-advertising as the AI businesses that we have incubated over the last decade start to mature and start to monetize.
spk06: Thank you. Next question comes from . Please go ahead.
spk01: Thank you. And good evening, . Thank you for taking my question. Congratulations on the very strong results and the outlook. So my question is about your EV business. Can management provide any cover on the scale of the financial investments that we are planning for the EV business this year? and also as well as if there is any update to the product timeline. We remember that in last earnings call management mentioned about planning to launch the EV car in three years time. We would like to check if there is any update to this plan given that the EV market has recently becoming more and more crowded with more newcomers and more capital inflow. So just want to check our timeline and also want to get a sense of what will our EV business roadmap look like. What kind of key business milestones can we expect this year and next year? Thank you.
spk02: Yeah, as you know, the EV business is a relatively independently operated company controlled by us. The goal is to make our latest and coolest technology available on the market as soon as possible. We mentioned that we intend to launch that within three years, and of course the team is trying very hard to make it available earlier, as soon as possible. And our thesis remains unchanged. Because Apollo is a very comprehensive platform for all kinds of technologies and we've been investing in this for many, many years that we see a lot of opportunities to offer unique user experience and technology through a seamless integration of software and hardware, as well as fully take advantage of infrastructure that's available to the consumers. Herman, do you have any financial color to add on that?
spk13: I think, you know, that the CEO just signed on. I think, you know, we're still working through our business plans. But, you know, to look at that whole EV market, you can actually, there's quite a few analysts that have given projection on the size and so forth. I think where we are is we're lucky in the sense that the hardest part, if you think about it on EVs and so forth, is, you know, the autonomous driving, that ability, being able to build intelligent driving And also, you know, being able to power infotainment within the car so that you're having more intelligence both within the car as a person drives and also, you know, outside of the car. So I think that would give us, you know, that ability to actually, you know, be able to design a car and to have those kind of technologies and products ready. So we don't have any particular numbers to give out now, but you do have, you know, projections on where the EV, you know, volume is going to be in three years. And, you know, you do have, you know, other automakers that have shown in the last few years. So we're going to be looking at that kind of model, and we're going to be looking at, you know, the market that best fits us, our profile, as Robin mentioned, so that, you know, in this model, maybe another way to look at this, if you look at, you know, where a lot of the EV cars are going, a lot of them are going direct to customers, right? If you look at the model with Intelligent, just like our speakers and so forth, in the past, the speakers, people sell hardware, right? When you think about EVs nowadays, you look at, for example, some of the cars, when they sell the cars, they're also trying to swap batteries. so that they can get users to actually have more frequent contact so that they can also make more money after the post sales of hardware so they could sell more services. So when you think about our business, number one, we're already selling a lot of services like intelligent driving. We're already getting a lot of our infotainment install in OEMs and so forth. So this whole business model of having more contact with the users, with the consumers to build a brand and also be able to drive more services after the initial self-hardware is something that we're very familiar with. So I think we'll be more prepared as we go into that model of EV and adapting to that direct to customers rather than the traditional way of just trying to make the dollars by selling just hardware.
spk06: Thank you. Next question comes from Gary Yu of Morgan Stanley. Please go ahead.
spk12: Hi. Thank you, Robin, Herman, and John. I have one follow-up question regarding your three-year kind of revenue mix outlook. Given today, the biggest part of your non-marketing revenue is coming from AI Cloud. So how should we look at contribution from various businesses in three years' time when non-marketing surpass your marketing revenue? Should we still expect kind of AI Cloud to be dominant driver of that, or if we expect some of these autonomous driving revenue and also car-hailing revenue will start to become more material. And a related question to that is, how should we look at margin given the revenue makeshift? So how should we look at the mobile ecosystem margin trend going forward? And by what time should we expect the non-marketing business to become profitable? Thank you.
spk02: Yeah, on the revenue mix, if you look at our AI cloud, we've been disclosing the revenue number and growth rate for a number of quarters. And you can probably do a projection based on the past performance. And there are many other ways that we can monetize our strong user base and AI technology through either intelligent driving or other things mentioned by myself and Herman. I think that when that all adds up, it should represent more than half of our total revenue, but the foundation is the same. We've been accumulating the user base for the past 20 years, and we've been invest in AI technology for more than 10 years. And this all comes together and opens up a lot of new opportunities for us to grow our revenue. I'll let Herman answer about the margin question.
spk13: Yeah, yeah. So, you know, on the margins, let me answer several ways. I think, number one, obviously, you know, mobile ecosystem, search and feed, that is, you know, a mature business growing not as fast. When you have a business that we are, you know, in where our search is the largest in China, where we have tremendous amount of traffic, obviously, you're going to have very good margins. But at the same time, you know, with our mobile ecosystem, we were able to afford a lot of investments in these AIs, and we're leveraging these AIs into new businesses. So it helps us, you know, allocate some of that cost structure into other businesses. But as we're wrapping up, you know, two type of businesses, one is, you know, to be business, right? When you think about AI cloud going into enterprises, And we're also wrapping up a 2G business, going into cities, working with municipalities and so forth. So you're going to see us getting impacted by the margins several ways. Number one is you're going to have a cost of sales. Whether we're selling more AI solution projects, you have cost of sales. Whether we're selling more projects with smart transportation, whether we're selling more displays, you're going to have cost of sales. Furthermore, when you're seeing a strong, steep ramp up of our AI cloud business, smart transportation and so forth, we have to hire ahead of the curve. We have to be looking at for the next six to 12 months where our sales are going to be and hire those salespeople in early so that we can train them for two quarters and so forth and then they can start going out there and get orders. So I think for the margins, as you're seeing, you know, for example, you're seeing us get very robust Q2 revenue guidance, then you should assume number one is a lot of that growth is coming from new AI business. You're going to see, you know, gross margin, you know, compared to last year. You're going to see, you know, gross margin this year more, you know, incrementally from AI business. So you've got to consider that. And secondly, you've got to consider the fact that we're going to increase our sales and marketing to support the current growth and also the next few quarters. You should expect, for example, us to accrue for a bad debt because these new businesses, 2B and 2G, they all have AR allowances, unlike our advertising. So these are the things you should consider. So let me just summarize. I think when you're looking at non-advertising, that the opportunity is in our – your typical cloud business, it's in smart transportation. And then within OGI, the key drivers are going to be related to intelligent driving, such as our ASD. And we think that our EV and our robotaxi. And then lastly, our smart devices. So here are the three, the few areas. And then in terms of margins, cost of sales, you're going to see at the end, you're already seeing that, for example, in Q1, And then we have to prepare for sales and marketing and also GNA. Okay?
spk06: Thank you for the questions. Next question comes from James Lee of Mizuho. Please go ahead.
spk03: Great. Thanks for taking my questions. Two here. First, on the cloud business, and clearly you guys are having a lot of success in AI point solutions through customized projects. And maybe can you talk about how you plan to make the business more scalable? How close are you in building a standardized solution so you can expand across various industries using third-party developers and system integrators? And also, do you have a backlog number so we can get a better understanding of the underlying trends? And second is, for second quarter, Herman, can you talk about maybe your expectation on expense growth and to the extent we can break out between core advertising and new investments? Thanks.
spk02: First of all, I think a lot of the projects we are taking for AI Cloud is very scalable. The solution can really be standardized on a vertical industry basis. We've been talking about smart transportation. A smart transportation project in one city can be easily copied to another city, and although it is loss-making right now, but the gross margin is very good at this time already. And going forward, as we do more and more of this kind of projects, I think margin will improve, and the investment in R&D will gradually pay off. I mean, the solutions are pretty standard from city to city. And more broadly, I think other industries, be it in the financial industry or in the energy industry, we've been building a standardized layer, mainly on the PaaS platform and service layer, we have a lot of AI capabilities, speech recognition capability, text-to-speech capability, OCR capability, natural language processing capability. There are lots of things that can be standardized, and we do work with system integrators to deliver turnkey solutions to many of our customers, and we will continue to do so. And going forward, I think the standard part of our AI cloud solution will become a bigger and bigger part of the total cloud revenue.
spk06: Thank you. Next question comes from the line of Han Jun Kim of Macquarie. Please go ahead.
spk05: Great. Thank you, management. As we looked at some of the cloud revenues for your perhaps larger peers in the market, we've noticed a few of their key accounts depart recently, partially sometimes for extenuating circumstances, but others, maybe just those customers want to build out their own services and so forth. So as we think about the stickiness of our own cloud revenues and perhaps dependencies on key accounts, can you give us any kind of indication of how we think about the stickiness of that and just in general some observations you might have had about the market situation?
spk02: Thank you. Yeah, I think at an early stage we may be very sensitive to one or two key customers, but as the base becomes larger and larger, any single key account customer will contribute a lower and lower percentage of our total revenue. I think this is kind of different from those standard app solutions to provide provided to those internet and media customers like some of our peers do. We've been more focused on vertical industries. We've been providing more AI-empowered cloud solutions. I think that's a more defendable approach and a direction that's not so sensitive to any one or few large customers.
spk06: Thank you. Next question comes from Tianhou of TH Capital.
spk09: Thank you, Manchman, for taking my questions. Congratulations on the good quarter. I have a quick question. In the EV car area, there are lots of new players in the market. Let's say Huawei right now has announced that they have the EV cars. So I think maybe it is better for the audience and for the street to understand what's the advantage of buying those EV cars compared with other guys. So that's a simple question. Thank you.
spk02: I mentioned that we've been investing in this for many years since 2013 and we've accumulated the best in class autonomous driving capability and over the years Apollo also morphed into a more comprehensive platform that offers all kinds of capabilities be it V2X capability or infotainment for individual vehicles I think at this time nobody on the planet has a more comprehensive solution than we do for smart EV that's why we are very confident we when we launch our own car we can provide the best user experience and best price to performance ratio for our our consumers. Our technology is just more advanced and mature than any other people in this industry. And on a broader note, I think Baidu has been investing very aggressively in AI. If you think about autonomous driving, it almost uses all kinds of AI technologies And we've been investing in this for more than 10 years, and we spent roughly 20 billion RMB in R&D last year, and we will continue to aggressively invest in R&D over the next 10, maybe 20 years, and we'll make sure that our technology, our AI technology, and our autonomous driving technology will continue to lead in this market. It's very hard for anyone who comes on the street new and makes this kind of claim. It's very hard to imagine an eBay maker with a smaller market share, let's say, if they are number four or number five in terms of market share, they can afford this kind of continued intensive investment in R&D. And I think it's widely known that autonomous driving will not become mature for the next 10 or even 20 years. So this kind of sustained intensive investment in R&D is necessary to keep the lead in terms of technology.
spk06: Thank you, management. With that, ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.
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